One Man’s Currency Is Another Man’s Bet

Gold necklaces in Bangkok. Gold has some commercial uses, including jewelry, but to the faithful, it’s money, not a commodity.Credit
Nicolas Asfouri/Agence France-Presse — Getty Images

What do you get when you combine evangelical fervor with leverage and rising speculation?

The gold market, circa 2013.

In the more than four decades since President Richard M. Nixon severed the dollar’s last ties to gold, there have been two bull markets in gold — markets that peaked not that far apart, when adjusted for inflation. To a believer, gold is different from any other commodity. The others are expected to rise and fall with supply and demand. A supply shock, perhaps caused by a drought in Brazil or a confrontation in the Persian Gulf, may send the price of orange juice or oil soaring. A fall in economic activity may depress the value of any industrial commodity. A commodity, like any other investment, can become overvalued or undervalued.

But to the faithful, that doesn’t include gold. Sure, it has uses in the real economy, like jewelry and dentistry. But that is not the important issue. To them, it is money. It cannot be overvalued.

There was a time when gold really was money, when the gold standard reigned supreme. Its record was not an especially good one. There was the minor issue of supply shocks — as when gold from the New World caused drastic inflation in Spain — and there were repeated panics and depressions in the 19th century. A determination to stick to the gold standard helped worsen the Great Depression.

But to those who revere gold, such problems are minor compared to the sins of fiat money, which is defined as money not anchored in gold but instead determined by central bankers, who can — and eventually will — surrender to political pressures to devalue the currency. Discretion will be abused.

Those who back the gold standard think “you can design a rule that will tell you what to do, no matter what the circumstances,” says Robert J. Barbera, the co-director of the Center for Financial Economics at Johns Hopkins University. “But there is no one-size-fits-all rule for monetary policy. Ultimately, you need discretion.”

Central bankers go in and out of fashion. Back in the late 1970s and early 1980s, as inflation grew and grew in the United States and other developed economies, their credibility was challenged as never before. Gold, and its sort-of sibling, silver, soared, but then crashed back to earth well before Paul A. Volcker, then the chairman of the Federal Reserve, proved he could and would tame inflation, even if doing so sent the American economy into back-to-back recessions.

During January 1980, as the first of those recessions was beginning, gold went from a little over $500 an ounce to $850 and then back under $700.

By early 1999, when Time Magazine put the Federal Reserve chairman, Alan Greenspan, on its cover as the head of “the Committee to Save the World,” central bankers had become geniuses. (The other members of that committee were the former Treasury secretary, Robert E. Rubin, and his deputy at the time, Lawrence H. Summers, who later succeeded Mr. Rubin.) The stock market was booming, recessions were distant memories and gold was under $300 an ounce.

After 1980, gold never got close to $800 an ounce until, once again, the central bankers began to look imperfect. In 2007, as the American economy struggled to deal with what was then seen as the subprime housing crisis, gold climbed back above $800 and then set a new high, in nominal dollars, early in 2008, early in the American recession.

This time around, the sin of central banks appeared to be one of inadequate regulation, and of allowing a credit boom to get out of hand. If William McChesney Martin Jr., a former Fed chairman, once said the Fed’s job was “to take away the punch bowl just when the party gets going,” Mr. Greenspan was spiking the punch during his final years.

The hostility to the Fed since then has been largely based on worries that, Ben S. Bernanke, Mr. Greenspan’s successor, was going to destroy the dollar. Having lowered short-term rates to virtually zero, the Fed and other central banks have purchased huge quantities of government bonds. That is not printing money in the sense that no printing press is involved, but in every other sense it is.

Surely, said those who believe in gold, burdensome inflation was just around the corner. The Republican platform in 2012 did not use the phrase “gold standard,” but said “as we face the task of cleaning up the wreckage of the current administration’s policies,” a Republican administration would appoint a “commission to investigate possible ways to set a fixed value for the dollar.”

By the time of the Republican convention, it turned out, gold had peaked at a little more than $1,900 an ounce. This week, in what looked like panic selling, the metal fell back below $1,400.

In 1980, as in this year, gold had attracted a lot of speculators who might or might not care about a gold standard, but who knew a rising market when they saw one. Exchange-traded funds have made it a lot easier to invest in gold — no need to store a gold bar or a bag of coins — and they have also made it much easier to borrow money to support such positions. Margin calls no doubt had something to do with Monday’s plunge, as they did with the collapse of silver futures back in 1980.

In 1980, a case could be made that those margin calls, in the futures market, were brought on by a conspiracy against the people who had driven prices up. An article in Fortune Magazine pointed to changes in the rules at the commodity exchange, making it all but impossible to speculate on silver prices continuing to rise. This time, there are no obvious changes in rules to explain the plunge. It may be that a lot of people simply placed bets with borrowed money, expecting a disaster that has not arrived, and now are scrambling to minimize their losses.

Perhaps, as in 1980, evidence is growing that the central bankers are getting it right — or at least right enough. By coincidence, the day after the Monday plunge in gold, the International Monetary Fund released its World Economic Report, with a chapter titled “The dog that didn’t bark: Has inflation been muzzled?” The chapter had a suitable quantity of “buts” and “howevers,” but the basic answer was “Yes,” in large part because people trust central bankers and assume that central bank inflation targets will be met, at least in the long run.

“Fears about high inflation should not prevent monetary authorities from pursuing highly accommodative monetary policy,” the I.M.F. concluded.

It may be a coincidence, but this week’s plunge coincided with growing publicity for a currency that sounds a little like gold, at least if you are not paying close attention. That is the digital currency called bitcoin, which has of late been more volatile than a dot-com stock in 1999. Invented in 2009, its supply supposedly is controlled by a rigid computer program, making it, like gold, not subject to central bank manipulation. It got an endorsement last week from The Economist magazine: “Regulators should keep their hands off new forms of digital money such as bitcoin,” the magazine wrote, proclaiming that the bitcoin’s “unique digital signature” makes it “impossible to forge.”

To gold advocates, that kind of talk is dangerous.

“The bitcoin is not the answer to the Federal Reserve’s depredations against the dollar,” wrote Steve Forbes, a former presidential hopeful, in his blog at Forbes.com. “The basic reason: It has no fixed value. It trades like a stock or commodity. In recent days it has been crashing after a spectacular rise in terms of dollars. Such volatility makes it useless as a means to do transactions.”

Of course, you could say something similar about gold.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

A version of this article appears in print on April 19, 2013, on page B1 of the New York edition with the headline: One Man’s Currency Is Another Man’s Bet. Order Reprints|Today's Paper|Subscribe